Macroeconomic Update

(percent) November 218 Macroeconomic Update Saudi economy adjusting to structural change The fundamentals of Saudi economy remain unaltered and we expect solid growth in the next few years. Accordingly, we still expect the economy to grow by 2.2 percent in 218 (compared to -.9 percent in 217), with an improvement in the oil sector lifting oil GDP to.2 percent in 218. Looking out into 219, we expect slightly slower growth in GDP, at 2 percent, due to a slower yearly rise in the oil sector, at 2. percent. On the non-oil side, we expect economic growth to continue improving on the back of another record level in budgeted government expenditure of SR1.1 trillion, as detailed in the 219 Preliminary Budget Report. We forecast that the combination of a higher Saudi export price with crude oil production at around 1. mbpd is expected to raise government oil revenue to SR99 billion in 218, compared to our previously forecasted SR76 billion. In 219, a marginally higher Saudi export price as well as higher levels of Saudi oil and refined product exports will push up government oil revenue percent year-on-year to SR629 billion. Moreover, as the recent quarterly budget statements have shown, 'Taxes on goods and services have been the fastest growing item in non-oil revenue so far. Looking ahead, we expect this segment to be one of the main contributors to the vast majority of rises in non-oil revenue year-on-year, in 218 & 219. For comments and queries please contact: Fahad M. Alturki Chief Economist and Head of Research falturki@jadwa.com Asad Khan Director rkhan@jadwa.com Head office: Phone +966 11 279-1111 Fax +966 11 279-171 P.O. Box 6677, Riyadh 11 Kingdom of Saudi Arabia www.jadwa.com Jadwa Investment is licensed by the Capital Market Authority to conduct Securities Businesses, license number 64-7. View Jadwa Investment s research archive and sign up to receive future publications: http://www.jadwa.com 1 Overall the Saudi economy has shown solid growth with the recent Q2 GDP data showing the economy expanded by 1.6 percent, year-on-year, with non-oil GDP rising by 2.4 percent. Despite this, we still see risks remaining in the year ahead. Apart from the most apparent risk of lower than forecasted oil prices in 219, we also see the possibility of a decline in consumption in the Kingdom as a key risk. Figure 1: Saudi Real GDP forecast 1 1 1 8 - - -8-1 -1 Real GDP Real oil GDP Real non-oil GDP 29 211 21 21 217 219F Released: November-7-218, 1: UTC+

(percent) (SR billion) November 218 Our economic forecast for the Kingdom remains unchanged for 218. We still expect the economy to grow by 2.2 percent in 218, with an improvement in the oil sector lifting oil GDP to.2 percent in 218. Likewise, on the non-oil side, we still see non-oil GDP rising by 1.4 percent during the same period Within this forecast, we expect to see non-oil private sector growth to improve to 1.1 percent, compared to.7 percent in 217. Saudi economic growth edging up Our economic forecast for the Kingdom remains unchanged for 218. We still expect the economy to grow by 2.2 percent in 218 (compared to -.9 percent in 217), with an improvement in the oil sector lifting oil GDP to.2 percent in 218. Likewise, on the non-oil side, we still see non-oil GDP rising by 1.4 percent during the same period (compared to 1. percent in 217). Within this forecast, we expect to see non-oil private sector growth to improve to 1.1 percent, compared to.7 percent in 217. The risks to growth, albeit diminishing, still remain linked to the implementation of VAT, expat fees & levies and energy price hikes. In fact, so far this year, business surveys, despite remaining in expansionary mode, have hinted to some fragility. The non-oil purchasing managers index (PMI), whilst having picked up in recent months, averaged.6 in the year-to-september 218, the lowest since at least 29 (Figure 2). Meanwhile, credit to private sector remains muted as rising interest rates makes private sector borrowing more expensive. Looking out into 219, we expect slightly slower growth in GDP, at 2 percent, due to a slower yearly rise in the oil sector, at 2. percent (Box 1). On the non-oil side, we expect economic growth to continue improving on the back of another record level in budgeted government expenditure of SR1.1 trillion, as detailed in the 219 Preliminary Budget Report (Figure ). We expect non-oil private sector GDP to rise by 1.8 percent, its highest level since 21, as the economy absorbs the disruptive effects of VAT and energy price reform enacted in 218, whilst energy price reform is kept to a minimum. That said, the continued rise in expat levies during 219 will add to operating costs of corporates, which is likely to affect profitability. Operating costs could also be affected by further rises in electricity tariffs for the industrial sector, which was spared in the previous round of hikes at the turn of this year. Moreover, as outlined in the most recent Fiscal Balance Program (FBP), scheduled hikes in the price of liquid petroleum gases (LPGs) and kerosene for the retail sector are expected to take place in 219. Total (retail and commercial) LPG and kerosene consumption currently accounts for roughly 7 percent of total liquid consumption in the Kingdom. Improving oil and non-oil revenue Oil prices have recently reached multi year highs (Box 2) and this improvement will be reflected in government oil revenue in 218. In Figure 2: Non-PMI and non-oil private sector growth 61 6 9 8 7 6 4 Non-oil PMI Non-oil private sector growth (RHS) 21 212 214 216 218* 11 9 7 1-1 Figure : Revised government expenditure to 221 1,2 1,1 1, 9 8 7 6 4 2 1 Preliminary 219 budget SR2 bn SR1 bn SR9 bn FBP SR9 bn 218 219 22 221 2 *218 = non-oil PMI year-to-september & Jadwa s non-oil private growth forecast

29 21 211 212 21 214 21 216 217 218F 219F (million barrels per day) (million barrels per day) November 218 Saudi Arabia is the only producer with enough immediate spare export capacity that can bring additional oil in response to short term market fluctuations...as such, we expect the Kingdom to make up a portion of loss in output from expected outages going forward. In 219, besides making up some of the declines from certain OPEC members, Saudi Arabia will also see the start-up of the Jazan refinery....which will help push Saudi crude oil production to 1. mbpd in 219. Box 1: Saudi Crude Oil Production Saudi crude oil production, according to direct communications data, averaged 1.2 million barrels per day (mbpd) in the year-to- September. This figure hides a ramp up in Saudi oil output in recent months as the Kingdom compensates for declining output from some OPEC members, such as Venezuela. In addition, in the run-up to reimposition of US sanctions, large declines in output were also registered from Iran with OPEC secondary sources data showing 22 tbpd quarter-on-quarter in Q 218. Looking ahead, unpredictability in supply from certain members and declines from other OPEC members is likely to continue. Additionally, as US sanctions on Iranian oil formally commence in November, even more crude oil is expected to come off-line. In fact, the National Iranian Oil Company (NOIC) itself has estimated that crude oil exports could drop by an additional thousand barrels per day (tbpd) when sanctions come into full effect. Saudi Arabia is the only producer with enough immediate spare export capacity, across all oil grade types, that can bring additional oil in response to short term market fluctuations. Based on US Energy Information Administration s (EIA) estimates of Saudi crude oil capacity and August s oil production, the Kingdom has around 1.6 mbpd of spare capacity, effectively 1 percent of total OPEC spare capacity. Looking ahead, as stated by the respective energy ministers of Saudi Arabia and Russia recently, both countries are expected to make up a portion of loss in output from expected outages going forward (for more on this please refer to our latest Quarterly Oil Market Update, published October 218). In 219, besides making up some of the declines from certain OPEC members, Saudi Arabia will also see the start-up of the Jazan refinery. According to recent reports, the refinery is 9 percent complete and is expected to enter production next year. Assuming the refinery is up and running at full capacity during 219, an additional 4 tbpd of crude oil could be needed. That said, when two new refineries, (Yasref & Satorp: 4 tbpd each) came online back in 214, it took a couple of years for the rises in refinery intake to materialize (Figure 4). As a result, we expect a similarly delayed rise in refinery intake following the Jazan refinery and have therefore adjusted our Saudi crude oil production forecast downwards to 1. mbpd for 219, versus 1.7 mbpd previously (Figure ). Figure 4: Saudi refinery intake will rise due to Jazan refinery start-up... 2.7 2. 2.2 Figure :...which will contribute to raising Saudi oil production to 1. mbpd in 219 1. 1 9. 9 2 1.7 1. 29 211 21 21 217 219F 8. 8

November 218 Oil prices have recently reached multi year highs and this improvement will be reflected in government oil revenue in 218. We forecast that the combination of a higher Saudi export price with crude oil production at around 1. mbpd is expected to raise government oil revenue to SR99 billion in 218...compared to our previously forecasted SR76 billion. In 219, a marginally higher Saudi export price as well as higher levels of Saudi oil and refined product exports.will push government oil revenue percent year-on-year to SR629 billion. fact, as the most recent quarterly budget statement showed, government oil revenue stood at SR298 billion in H1 218, representing 6 percent of the budgeted total for 218. We forecast that the combination of a higher Saudi export price with crude oil production at around 1. mbpd is expected to raise government oil revenue to SR99 billion in 218, compared to our previously forecasted SR76 billion. In 219, a marginally higher Saudi export price as well as higher levels of Saudi oil and refined product exports will push government oil revenue up percent year-on-year to SR629 billion. Box 2: Crude Oil Prices With Brent oil prices currently at four year highs, at around $7 per barrel (pb), we have revised our oil price forecast for 218, and now expect Brent oil to average $7 pb in 218, up from $68 pb previously. For 219, we expect any outages from OPEC members such as Iran, to be adequately compensated for by other members, such as Saudi Arabia. Additionally, recent statements from the Russian energy minister have suggested that its country s oil production could rise by tbpd in 219, adding an extra layer of security against volatility in supply. That said, it is still unclear to what extent other oil producers can make up for the expected decline in Iranian output following the re-imposition of sanctions. Bearing this in mind, we have revised our Brent price forecast to $7 pb in 219, also up from $68 pb previously (for more on this please refer to our latest Quarterly Oil Market Update, published October 218). Meanwhile, the latest quarterly budget statement also showed that the government s efforts to raise non-oil revenue through structured economic reform continues to bear fruit. In the year up to Q 218, non-oil revenue was up by 48 percent year-on-year. Most of these gains came from 'Taxes on goods and services, which more than doubled year-on-year to SR8 billion, representing 97 percent of the budgeted total for the whole of 218 under this segment. This rise was due to a number of initiatives which have been rolled out recently, including the introduction of value added tax (VAT), expat levies and excise tax. Moreover, the 'Taxes on goods and services segment will be the fastest growing item in non-oil revenue next year, rising by SR22 billion and contributing to the vast majority of rises in non-oil revenue on a year-on-year basis (Figure 6). The rises are expected to come about from higher fees related to expat levies, and by a reduction in VAT threshold. Currently, VAT applies to enterprises with annual revenues of at least SR1 million, but in 219 this threshold will be lowered to include enterprises with annual revenues of SR7 thousand and above. As a result, an estimated thousand small and medium enterprises (SMEs) will be eligible for processing VAT, all of which will contribute to raising non-oil revenue. In the recently released preliminary budget for 219, the Ministry of Finance (MoF) revised 218 s revenue up by SR99 billion to total SR882 billion, compared to SR78 billion previously. Assuming that non-oil revenue estimates are unchanged for 218, at SR291 billion, and with a revised fiscal deficit of SR148 billion, this would imply government oil revenue of SR91 billion in 218, compared to SR492 billion previously. Using the projections stated in the FBP, and assuming these are unchanged, the government is expecting a yearly rise of SR22 billion in tax revenue in 219. Adding this to 218 s budgeted non-oil revenue of SR291 billion, and assuming no 4

(SR billion) (SR billion) November 218 The 219 preliminary budget also detailed upward revision on the expenditure side. yearly rises in non-oil/non-tax revenue, this pushes non-oil revenue to SR1 billion in 219. Deducting this from total revenue of SR978 billion in 219 implies oil revenue of circa SR66 billion, compared to our revised estimate of SR629 billion. Expenditure rising The compensation of employees (wage bill) is still expected to constitute a substantial level of total expenditure. Moreover, wage bill costs could rise even higher following the recently announced restoration of annual allowances to all public sector employees. Despite this, we believe that any rises in expenditure highlighted in the preliminary budget would cover the rises related to annual allowance payments. Figure 6: Breakdown of tax revenues The 219 preliminary budget also detailed upward revision on the expenditure side, although according the preliminary budget, these rises partially relate to; a royal Decree which resulted in the reinstatement of annual allowances and a cost of living allowance for citizens during the fiscal year 218 and consolidation of revenues which, in turn, will result in assigning budget expenses for some government entities that previously collected their own revenue. As outlined in the preliminary budget, a key objective of the government is to balance operating expenses with more growth enhancing capital expenditures. On the operating expenses side, the focus will be on improving efficiency of spending and achieving savings that can be directed to other projects and expenditures, through the Spending Efficiency Realization Centre (SERC). That said, the compensation of employees (wage bill) is still expected to constitute a substantial level of total expenditure. When applying the wage bill estimates outlined in the updated FBP to the revised expenditure figures, we can see that the wage bill is expected to make up 4 percent of total expenditure by 22. Despite following a declining trend between 218 and 22, it nevertheless exceeds the 4 percent target outlined in the NTP. Moreover, wage bill costs could rise even higher following the recently announced restoration of annual allowances to all public sector employees. Although a vast majority of allowances were restored following a royal decree in April 217, the annual allowance were expected to be linked to appraisals of employee s performance but following a recent government announcement, these allowances would revert to the older non-performance linked system from 219 onwards. Despite this, we believe that rises in expenditure highlighted in the preliminary budget would cover any rise in annual allowance payments. In the period to Q 218, the capital spending side of the expenses (capex) was up 1 percent year-on-year, to SR11 billion. According to the 218 fiscal budget, capital spending will total SR2 billion, Figure 7: Government expenditure by type* Taxes on income, profits and capital gains Taxes on goods and services Taxes on trade and transactions Other Taxes 17 1 1 11 9 7 1-1 217 218E 219F 1,2 1, 8 6 4 2 Current Capex 791 8 881 82 82 722 21 28 14 2 21 262 21 216 217 218F 219F 22F *218-22 capex and current expenditure = Jadwa estimates

(SR billion) (SR billion) November 218 In the period to Q 218, the capital spending side of the expenses (capex) was up 1 percent year-on-year, to SR11 billion. According to the 218 fiscal budget, capital spending will total SR2 billion, compared to SR18 billion in 217. In 219, capex will be continue to be channeled towards Vision 2 programs that directly contribute to economic growth and job opportunities for citizens. In this respect, we expect up to a third of the expected rise in total expenditure in 219, as outlined in the preliminary budget, to be allocated to capex. Accordingly, capex could rise by up to SR billion, or 1 percent year-on-year in 219, to reach SR2 billion, versus the previously projected SR218 billion. compared to SR18 billion in 217. In 219, capex will continue to be channeled towards Vision 2 programs that directly contribute to economic growth and job opportunities for citizens. In this respect, we expect up to a third of the expected rise in total expenditure in 219, as outlined in the preliminary budget, to be allocated to capex. Accordingly, capex could rise by up to SR billion, or 1 percent year-on-year in 219, to reach SR21 billion, versus the previously projected SR218 billion (Figure 7). Moreover, MoF has stated that it plans to distribute spending in a more balanced manner throughout the fiscal year, in order to boost economic growth. In the past, expenditure has tended to rise rapidly in the last quarter of each year (Figure 8) but we expect this to be somewhat different this year. According to the latest quarterly budget statement, 69 percent of total budgeted expenditure for 218 had already been disbursed up to the third quarter of 218, compared to 61 percent in the same period in both 216 and 217. Part of this improvement in the management of expenditure is due to the introduction of the electronic Etimad portal at the start of 218. Prior to the launch of the portal, government spending had been handled manually, therefore making it more difficult and time-consuming to track government transactions. According to the MoF, the digital Etimad system will improve controls and transparency in the spending process and as well as raising the level of communication between it and contractors. Whilst the system has not been fully rolled-out to include all government entities and contractors, the MoF is expected to make Etimad mandatory for all government projects from 219 onwards, which should result in further improvements in the distribution of government expenditure next year. Fiscal deficit improves in 218 A sizable rise in government oil revenue, despite higher than budgeted government expenditure, will mean the fiscal deficit is set to decline. As a result, we now expect the Kingdom s fiscal deficit to decline to SR19 billion, or 4.6 percent of GDP in 218. Our higher forecast for oil revenue means we expect a slightly lower deficit than detailed in the preliminary budget report, at SR148 billion ( percent of GDP). That said, due to our lower forecast for government revenue in 219 compared to official estimates, we expect the fiscal deficit to widen next year, at SR164 billion (.1 percent of GDP) compared to MoF estimates of SR128 billion (4.1 percent of GDP). Figure 8: Expenditure on a quarterly basis Figure 9: Composition of public debt 4 2 2 1 1 Q1 16 Q2 16 Q 16 Q4 16 Q1 17 Q2 17 Q 17 Q4 17 Q1 18 Q2 18 Q 18 6 Domestic sukuk Intl. sukuk Intl. bonds Intl. loans Domestic bonds 4 2 1 Oct-1 Oct-16 Oct-17 Oct-18 6

$ billions) ($ billions) November 218 The government has also revised its borrowing requirement for the next few years. According to the preliminary budget report, public debt projections have been revised up from SR/SR8 billion, to SR76/SR848 billion between 218 to 221. By the end of 221, public debt is expected to total 2 percent of GDP, lower than the percent limit outlined under the NTP. Latest data on the external sector shows the Kingdom maintaining a surplus in the current account. As of Q2 218, the current balance stood at $19.2 billion, having been supported by sizable improvements in the trade balance. Higher debt projected to 221 Public debt totaled SR44 billion at the end of 217, but had risen to SR billion by end of Q 218. Since then, there have been two domestic sukuk issuances totaling SR8 billion, pushing total debt to SR8 billion by October 218. According to the preliminary budget, the Kingdom s total debt is expected to rise to SR76 billion in 218, equivalent to 19 percent of GDP. Despite this, due to a major improvement in the fiscal position of the Kingdom in 218, we expect public debt to be slightly less than stated for this year, although any further debt issuance during the remainder of the year is most likely be raised domestically (Figure 9). The government has also revised its borrowing requirement for the next few years. According to the preliminary budget report, public debt projections have been revised up from SR/SR8 billion, to SR76/SR848 billion between 218 to 221. By the end of 221, public debt is expected to total 2 percent of GDP, lower than the percent limit outlined under the NTP. The Kingdom still enjoys ample domestic liquidity (see credit growth section), thus affording it the ability to continue financing part of the additional debt through domestic bonds. Looking to 219, we expect around half of 219 s projected SR12 billion debt requirement to be funded internally, with the remainder from international issuances, in-line with the trend seen in recent years (Figure 1). Improvements in both oil and non-oil exports Latest data on the external sector shows the Kingdom maintaining a surplus in the current account. As of Q2 218, the current balance stood at $19.2 billion, having been supported by sizable improvements in the trade balance. In fact, the Kingdom saw the value of total exports rise by percent year-on-year, to $14 billion in H1 218, which was supported by both oil and non-oil export growth. Whilst oil exports improved by percent, or $27 billion year -on-year, non-oil exports rose by an equally sizable percent, or $7.1 billion, year-on-year. Non-oil exports saw major rises in petrochemical, plastics and metals. An improvement in international prices helped push up the value of exports for petrochemicals and plastics. Meanwhile, despite no major rises in the price of base metals as a whole, the Kingdom Figure 1: Breakdown of domestic versus international debt issuance 1% 9% 8% 7% 6% % 4% % 2% 1% % Intl. Domestic 21 216 217 218E Figure 11: Petrochemicals, plastics and metals showing large yearly rises 1.8 1.7 1.6 1. 1.4 1. 1.2 1.1 1..9.8 Petrochemicals Plastics and rubber Metals (RHS)..4.4...2.2 Jun-14 Jun-16 Jun-18 7

(percent) November 218 Non-oil exports saw major rises in petrochemical, plastics and metals. An improvement in international prices helped push up the value of exports for petrochemicals and plastics. Meanwhile, despite no major rises in the price of base metals as a whole, the Kingdom saw the value of such exports rise by 6 percent year-on-year in H1 218. A pick-up in the value of goods imported was also seen in H1 218. Imports rose by 2 percent year-onyear in H1 218 in-line with improving non-oil activity Overall, we now expect to see a slight higher imports in 218 and 219, as opposed to a mild decline previously. saw the value of such exports rise by 6 percent year-on-year in H1 218 (Figure 11). We see these rises partially as a result of recent measures introduced by government. More specifically, the establishment of an export bank, by the Minister of Energy, Industry and Mineral Resources (MEIM), with the aim of supporting the sale of industrial and mining products internationally, and a SR billion export support initiative by the Ministry of Commerce and Investment (MOCI), will have helped raise such exports. A pick-up in the value of goods imported was also seen in H1 218. Imports rose by 2 percent year-on-year in H1 218 in-line with improving non-oil activity (Figure 12). That said, part of this is also likely related to a decline in the value of the trade-weighted dollar compared to a year ago, which could also explain why import values have risen but import volumes have remained virtually unchanged year-on-year in H1 218. Overall, we now expect to see a slight higher imports in 218, as opposed to a mild decline previously. Nevertheless, we still expect the trade balance to improve during the year, which will help maintain a positive current account balance. As such we forecast a surplus of $77 billion in 218, or 9.6 percent of GDP, up from $7 billion and 9. percent in our previous forecast. Looking ahead, whilst we expect import values to keep rising marginally in 219, growth in both oil and non-oil exports will help maintain a healthily current account surplus of $9 billion in 219, or 1. percent of GDP. In the recent Future Investment Initiative in Riyadh, the head of the Public Investment Fund (PIF) stated that whilst the split between domestic and international assets were currently 1/9 percent, the aim was to get a / split by 2. At the same time, there are ambitions for PIF to reach $2 trillion in assets by 2, up from around $4 billion currently. From the macro-perspective, such large amounts of international investment will result in net outflows under the non-reserve financial account, something which has already been seen in 217. According to full year 217 balance of payments data, there was an outflow of $6 billion in Other investments last year, which we believe was driven, in part, by the PIF, and by other independent government entities, such as pension funds. As such, as the PIF continues to channel sizable investments internationally, in a bid to push towards economic diversity under the Vision 2, we expect such outflows to continue at similar levels in the next few years, with around $18 billion in Other outflows seen in Figure 12: Imports begin to show yearly rises in Q2 218 1 1 - -1-1 -2-2 - Import growth % yoy Non-oil sector growth % yoy (RHS) -1 Q2 214 Q2 21 Q2 216 Q2 217 Q2 218 6 4 2 1 Figure 1: Market Rates in Saudi Arabia 6 Reverse Repo Repo -month SAIBOR 4 2 1 Oct 8 Oct 1 Oct 12 Oct 14 Oct 16 Oct 18 8

November 218 Overall, we see the above factors helping push up FX reserves by $9 billion, to a total of $ billion at the end of 218 and to $8 billion by end 219. Further rises in US interest rates will add upside pressure to the cost of funding. So far in 218, credit growth showed modest yearly rises by an average of.6 percent. Moving forward, we expect some uplift in credit as a result of improving economic sentiment related to higher oil prices and due to the larger disbursement of government capital spending. Overall, we have revised our inflation forecast for the full year of 218 to average around 2.6 percent, down from our previous forecast of.1 percent...accounting for the slowdown in the housing sector, which weighs 2. percent in the updated CPI basket. Overall the Saudi economy is ticking along reasonably well H1 218. Overall, whilst an improvement in export revenue will be one of the main factors behind a rise in SAMA FX reserves in 218 and 219, higher outflows through the non-reserve financial account, will mean the rise is somewhat less sharper. Overall, we see the above factors helping push up FX reserves by $9 billion, to a total of $ billion at the end of 218 and to $8 billion by end 219. Credit growth recovers slowly, some pick up expected Since the beginning of the year, the Saudi Arabian Monetary Authority (SAMA) has increased the reverse repo and repo rates by 2 basis points (bps) three times; in March, June and September 218. The rises came in-line with the US Fed s interest rates hikes. In addition, the -month SAIBOR/US-LIBOR spread has recently widened, after narrowing for several months in the beginning of the year. As a result, the cost of funding within the Kingdom has been trending upwards, with three month SAIBOR increasing to 2.7 percent in October 218, compared to 1.89 percent in January 218 (Figure 1). Looking ahead, further rises in US interest rates and the continued policy of draining excess liquidity within the banking system in order to maintain a positive SAIBOR/LIBOR spread will add upside pressure to the cost of funding. More specifically, latest US survey data suggests three US rate hikes being more likely in the coming year and we therefore expect SAMA s base lending rate to reach. percent by the end of 219, up from 2.7 percent currently. So far in 218, credit growth showed modest yearly rises, with bank credit to the private sector turning positive since April, by an average of.6 percent. Moving forward, we expect some uplift in credit as a result of improving economic sentiment related to higher oil prices and due to the larger disbursement of government capital spending. Therefore, we expect to see bank credit to the private sector rising only marginally in 218, by 1 percent year-on-year (for more on this please refer to our latest Monetary update, published October 218). Inflationary pressure due to VAT and utility price hikes Overall, we have revised our inflation forecast for the full year of 218 to average around 2.6 percent, down from our previous forecast of.1 percent, accounting for the slowdown in the housing sector, which weighs 2. percent in the updated CPI basket. The slowdown comes mainly from the decline in housing rental prices, which have remained in the negative territory since July 217. In 219, we expect inflation rates to average around 1.1 percent, as prices are expected to continue the downward trend in the short term, to adjust with VAT and the structural reforms in the labor market (for more on this please refer to our latest Inflation update, published October 218). Risks to forecast Overall the Saudi economy is ticking along reasonably well, as recent Q2 GDP data showed the economy expanded by 1.6 percent, year-on-year in Q2 with the oil sector improving by 1. percent (44 percent share of GDP), non-oil GDP rose 2.4 percent. Within the non 9

November 218...but despite risk of lower than forecasted oil prices, we also to see the possibility of a decline in consumption in the Kingdom as a key risk. -oil sector, non-oil private sector GDP was up 1.1 percent (9 percent share of GDP) and the government sector s GDP rose significantly, by 4 percent (16 percent share of GDP). It is evident that the set of expansionary measures implemented during the year have been sufficient to continue bringing about solid growth in the non-oil private sector. Despite this, we still see risks remaining in year ahead. Apart from the most apparent risk of lower than forecasted oil prices in 219, we also see the possibility of a decline in consumption in the Kingdom as a key risk. As we outlined in our previous macroeconomic update, a net rise in the number of expats and their dependents leaving the Kingdom as well as rising costs for corporates related to higher monthly expat levies, could have negative aggregate effects on overall consumption in the Kingdom, not only in 218, but also over the next few years. Disclaimer of Liability Unless otherwise stated, all information contained in this document (the Publication ) shall not be reproduced, in whole or in part, without the specific written permission of Jadwa Investment. The data contained in this research is sourced from Thompson Reuters Datastream, Haver Analytics, and national statistical sources unless otherwise stated. Jadwa Investment makes its best effort to ensure that the content in the Publication is accurate and up to date at all times. Jadwa Investment makes no warranty, representation or undertaking whether expressed or implied, nor does it assume any legal liability, whether direct or indirect, or responsibility for the accuracy, completeness, or usefulness of any information that contain in the Publication. It is not the intention of the publication to be used or deemed as recommendation, option or advice for any action(s) that may take place in future.. 1

November 218 Key Data 211 212 21 214 21 216 217 218F 219F Nominal GDP (SR billion) 2,17 2,76 2,8 2,86 2,44 2,419 2,7,1,24 ($ billion) 671 76 747 76 64 64 687 8 862 (% change) 27.1 9.6 1. 1. -1. -1.4 6. 17. 7. Real GDP (% change) Oil 12.2.1-1.6 2.1..6 -.1.2 2. Non-oil private sector 8.1.6 7..4.4.1.7 1.1 1.8 Non-oil government 8.4..1.7 2.7.6 1.7 2.2 1.4 Total 1..4 2.7.7 4.1 1.7 -.9 2.2 2. Oil indicators (average) Brent ($/b) 112 112 11 99 2 4 4 7 7 Saudi ($/b) 14 16 14 96 49 41 1 71 7 Production (million b/d) 9. 9.8 9.6 9.7 1.2 1.4 1. 1. 1. Budgetary indicators (SR billion) Government revenue 1,118 1,247 1,16 1,44 616 19 692 891 942 Government expenditure* 88 916 994 1,14 1,1 96 9 1, 1,16 Budget balance 28 1 162-96 -8-417 -28-19 -164 (% GDP) 11.1 12..8 -.4-1.7-17.2-9. -4.6 -.1 Gross public debt 1 99 6 44 142 17 44 76 678 (% GDP).4.6 2.1 1.6.8 1.1 17.2 19.1 21. Monetary indicators (average) Inflation (% change) n/a 2.9. 2.2 1.2 2.1 -.8 2.6 1.1 SAMA base lending rate (%, end year) 2. 2. 2. 2. 2. 2. 2... External trade indicators ($ billion) Oil export revenues 18 7 22 28 1 17 17 2 244 Total export revenues 6 88 76 42 24 184 221 28 299 Imports 12 142 1 18 19 128 119 122 124 Trade balance 24 247 22 184 44 6 12 16 176 Current account balance 19 16 1 74-7 -24 1 77 9 (% GDP) 2.6 22.4 18.1 9.8-8.7 -.7 2.2 9.6 1. Official reserve assets 44 67 726 72 616 6 496 8 Social and demographic indicators Population (million) 28.2 28.9 29.6. 1. 1.7 2.6.4 4. Saudi Unemployment (1+, %) 12.4 12.1 11.7 11.7 11. 12. 12.8 12. 12.1 GDP per capita ($) 2,827 2,471 2,22 24,962 21,9 2,18 21,7 24,46 2,67 Sources: Jadwa Investment forecasts for 218 and 219. General Authority for Statistics for GDP and demographic indicators, Saudi Arabian Monetary Agency for monetary and external trade indicators, Ministry of Finance for budgetary indicators. 11